With 75 pages detailing options for change, Inland Revenue appears to be moving to a "close enough is good enough" approach to FBT.
Simplifying classifications, removing logbook requirements, and aligning exemptions with practical business realities should ease compliance for many employers. However, some of the changes like vehicle revaluations and tiered rates based on fuel type, could increase the administrative burden on some businesses. Overall, the direction is positive, but careful implementation and clear guidance will be key to ensuring the reforms achieve their goal of reducing ambiguity without adding new complexity.
Motor vehicles
Motor vehicles is the largest category in the FBT regime, and is perhaps the most complex and confusing for businesses due to the stringent criteria for what qualifies as a work-related vehicle. There are also rules governing exempt days, which apply even when a vehicle is available but not in use, including situations where an employee is on holiday, and the vehicle remains at home.
The proposed adjustments are:
- Increasing the weight limit for work-related vehicles to accommodate the heavier designs of modern models and removing emergency vehicles from the regime.
- Updating the taxable benefit percentage on the GST-inclusive cost price (currently 20%) to reflect the running costs of modern vehicles that have a variety of different fuel types. This would also involve recalculating the vehicle's value every four years and eliminating the tax book value method. The proposed rates are:
- Petrol/diesel: 26% (6.5 per quarter)
- Hybrid: 22.4% (5.6% per quarter)
- Fully electric: 19.4% (4.8% per quarter)
- Vehicle classification would be put into three categories based on their primary use, removing the need for logbooks to claim exempt days. Vehicle classification would be verified through evidence such as employment agreements, employer policy manuals, employee letters specifying permitted private use, and guidelines for company vehicle usage. FBT would then be charged on a portion of that vehicle’s value based on its primary usage:
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Category
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Requirements
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Proposed rate
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1
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- Vehicles predominantly available for employee’s unrestricted private use, with the vehicle generally being reflected in the employee’s remuneration package
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100%
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2
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- Vehicles predominantly for business use, with restricted private use
- Employee may use the vehicle for travel to and from work, but not at other times
- A vehicle will be allocated to a single employee (although other employees may use the vehicle during business hours)
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35%
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3
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- Vehicles solely for business use with no personal usage (other than incidental use)
- Used solely for commuting to and from multiple workplaces/worksites
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0%
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The main difference between Category 2 and 3 vehicles is employee travel patterns. If an employee works at a fixed location, home-to-work travel is private, making it Category 2. For employees who travel straight to various job sites (eg, builders) the vehicle would likely be classified as Category 3 and exempt from FBT.
To prevent major shareholder-employees from misusing this, Category 2 vehicles must have a cost base under $80,000, given their influence over vehicle use.
Additionally, "incidental travel," would be defined as rare, short, ad hoc, and non-remunerative, and the occasional use of incidental travel would not attract FBT or affect the vehicle's classification.
Unclassified benefits
Unclassified benefits cover small, occasional perks like flowers, Christmas gifts, or store discounts, with current FBT exemptions capped at $300 per employee per quarter or $22,500 annually for an organisation.
To improve clarity and reduce administrative complexity, Inland Revenue has proposed removal of the current thresholds and replacing them with an exemption for benefits under $200 (GST inclusive) if benefits are provided infrequently and are unrelated to pay. This aims to remove small one-off items such as flowers from the regime, while ensuring larger items such as gym memberships are still captured.
Alternatively, creating a list exempt benefits for items such as flowers and token gifts has also been proposed.
Entertainment
Entertainment tax rules are a significant compliance headache for businesses, second only to FBT. Ambiguities in defining whether items are a fringe benefit or deductible such as lunch outings versus gift cards for the same venue add to the confusion.
The proposed changes aim to streamline this by incorporating entertainment under the FBT regime, with a $200 per employee exemption. A new "entertainment" category taxed at a flat rate of 49.25% would cover benefits for both employees and non-employees, while simplifying GST adjustments by consolidating them into the FBT return process.
Food and beverages that are not consumed at a party or other social occasion/celebration (ie, teamwork lunches) would be exempt from FBT.
Other proposals
Other recommendations in the submission include an option to pay FBT for quarters one to three based on 25% of the prior year’s liability, with a final reconciliation in quarter four.
IRD is also proposing to move stored value cards (ie, Prezzy Cards) from the PAYE regime to the FBT regime, as well as changes to dealing with global insurance policies treating the payment as a pooled benefit.
Increased audit activity
We have seen a 50% rise in audit activity in the first half of the financial year. This trend appears to be reflected in the submission, with proposed changes to increase monitoring including a requirement to detail the benefits provided and a disclosure in the income tax return to confirm if an FBT return is filed.
Inland Revenue has also commenced a digital advertising campaign targeting common FBT errors, and may focus on particular industries such as construction. Getting it right before being targeted by Inland Revenue will mitigate potential penalties.
2025 FBT compliance
With the 3 June 2025 filing deadline approaching, it's a great time to consider alternate rate calculations for non-cash benefits given to employees, such as:
- Motor vehicles: Special consideration needs to be given to what qualifies as a work-related vehicle and the specific exempt days that can be claimed (if any).
- Low-interest loans: Loans or income advances with rates below the prescribed threshold do attract FBT - the current threshold from1 April 2025 is set at7.38% - however these rates do change regularly.
- Discounted goods and services: Free or subsidised items such as car parks, gift cards, flights etc can attract FBT.
- Employer contributions to health insurance with added GST complexity for life insurance benefits.
The full alternate rate calculation adjusts the attributed tax rate from 63.93% to employees' marginal tax rates, benefiting those earning under $180k. However, this year’s changes to income tax brackets (31 July 2024) while FBT brackets remain unchanged until 1 April 2025 has resulted in a new formula to determine attribution benefits. This adds risks if you’re rolling forward outdated workpapers, so an accurate review is key.
